MoneyGram International: Now Empowered By Blockchain

MoneyGram International: Now Empowered By Blockchain

The share price of Blockchain stocks have appreciated by triple digit figures this year similarly to biotechs. Ripple, the third-most valuable cryptocurrency after Bitcoin and Ethereum has appreciated by more than 200%.

Also, while most of the talk has been about blockchain as a store of value (bitcoin) given the unprecedented amount of dollars being pumped in the economy by the Fed as part of monetary stimulus, there has been less focus on the use of the technology to transfer value in real time payment systems.

Figure 1: Comparison of price performance of Ripple (XRP-USD), Grayscale Ethereum Trust (OTCQX:ETHE) and Grayscale Bitcoin Trust (GBTC).

ChartData by YCharts

In this respect, MoneyGram International (NASDAQ:MGI) had forged a strategic partnership with Ripple back in June 2019 with the latter having more of a startup status at that time. Moreover, one specificity of the agreement was that it was Ripple which invested in the capital of MoneyGram instead of it being the other way around.

More importantly, as part of the partnership, the money transfer company could use Ripple’s blockchain-based payment protocol and its cryptocurrency.

At that time, MoneyGram had been leaking money with revenues sliding, and at one point, there was even talks about China’s Ant Financial possibly acquiring the company for $1.2 billion.

MoneyGram’s stock jumped more than 150% on announcement of the Ripple’s deal taking its market value to $190 million while most of the attention was focused on the much-anticipated announcement of the launch of Facebook’s (NASDAQ:FB) digital currency, Libra.

Figure 2: Share price and revenue performance.

ChartData by YCharts

One year and a few months into the partnership, MoneyGram’s transformed digital business has delivered impressive revenues as the company has steered clear from a downwards financial growth trajectory.

This is explained by a growing number of active customers helping to deliver year-over-year revenue growth consisting of money transfer transactions for the quarter. This also impacted positively on profitability and EBITDA as I will explain later.

Figure 3: Customer progression.

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Source: Q3-2020 earnings presentation.

Another key aspect of digital transformation is the consumer direct channel, MoneyGram Online, a catalyst for new customer acquisition. Demand for the MoneyGram app surged with 85% of online transactions now done on mobile devices.

Now, more online transactions are synonymous with less man-hours dedicated to answering customer calls, resulting in reduction in operating expenses and higher margins at nearly 11%.

Figure 4: Quarterly revenue progression.

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Source: Seeking Alpha

Pursuing further, a large portion of MoneyGram’s customers are migrant workers who make remittances to family and friends staying abroad and contrarily to what is commonly thought, have not stopped sending money to their loved ones despite COVID-induced unemployment in the U.S. Hence for the third quarter, the company reported 5% increase in year-over-year money transfer revenue growth, which was led by an increase in global active customers.

Thus, after returning to growth in June and then reporting a record-breaking July for transactions, the momentum continued into August and September resulting in 10% transaction growth for the quarter.

Also as evidenced by the falling trend in operating expenses since the last five quarters, the company has also been cutting costs aggressively. Measures have included closing U.S. call centers, streamlining the workforce including shifting jobs to low-cost locations like Poland.

According to the executives, “The margin improvement resulted from permanent efficiency gains, as well as some cost containment efforts induced by the pandemic.”

Optimization of expenses is crucial in the money transfer industry where disruptive technologies have completely changed the market dynamics.

Competitive position

Money transfer companies like MoneyGram and Western Union (NYSE:WU), which historically operate a vast physical network including post offices, banks, and merchants in more than 200 countries, have been challenged by an accelerated digital transformation since the last three years.

So, in addition to competing among themselves for business, financial institutions face FinTech startups that offer much cheaper solutions like WorldRemit and TransferWise.

Hence, the use of Ripple’s “liquidity on demand” technology, xRapid for foreign exchange settlements and the processing of cross-border payments has proved to be a good choice for MoneyGram to improve on efficiency. It has been able to reduce reliance on traditional foreign exchange markets to meet its settlement obligations, which required upfront purchases of most currencies.

Figure 5: Comparing Transaction speed of Bitcoin and Ripple.

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Source: Cointelegraph.com

Exploring further, the partnership with Ripple established in 2019 was beneficial for MoneyGram as it enables faster transaction speed at lower costs.

Now, one and a half years later, its competitor Western Union is studying and deliberating the “payments-as-a-service” model that Ripple allows for.

Looking back in the rear mirror, in April 2019, Western Union had also been testing Ripple’s technology for some time, but had not adopted it due to associated costs being on the high side.

Therefore, one of the risks for MoneyGram is that Western Union enters into an agreement with a blockchain company and constitutes a bigger competitive threat. Also, the larger financial institution recorded a strong performance in third quarter consumer-to-consumer transactions and remittances, with digitization of its services being a key driver of growth.

Figure 6: Comparison of key metrics.

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Source: Seeking Alpha

However, the smaller financial institution seems to be resisting well.

In this context, there has been a case where Western Union got very aggressive on the U.S. to Mexico online pricing, but customers after performing comparison shopping still chose MoneyGram. The latter was also able to fend off competition from FinTechs. This has been translated in retention rates of 80% according to the earnings call report.

Consequently, MoneyGram seems to have benefited from a first-mover advantage with that partnership with Ripple.

Also, in addition to using Ripple’s technology, it entered into a two-year “strategic partnership” with the blockchain company, an agreement which also included an equity investment by Ripple of $30 million in MoneyGram by buying newly issued shares at a price significantly higher than the stock market price with a further option to acquire an additional $20 million.

Finally, in absence of a Libra style cryptocurrency by Facebook operating in a global market for “remittances” or transfers effected by migrants to their countries of origin, MoneyGram, as an early adopter of blockchain, appears to be competitively safe, at least for the time being.

Valuations and key takeaways

According to the World Bank, overall global remittance was expected to grow 3.7% to reach $715 billion in 2019 including $549 billion to developing nations. This projection is aligned to statements made by the executives during the third-quarter earnings call, according to whom, MoneyGram’s transaction growth (excluding the U.S. to U.S. market) was impressive at 14% and this momentum has been maintained “through the first 29 days of October”.

It is for this reason that for the fourth quarter, the company anticipates reporting global revenue growth of approximately 1% on the continued strength of the money transfer business despite being adversely impacted by lower investment income.

Based on these revenue trends coupled with the continued expense benefit of its digital transformation, the company anticipates reporting adjusted EBITDA growth of approximately 10% year over year for the fourth quarter.

On the other hand, the excessively high debt level may pose a credit risk. In this matter, Long Term Debt to Total Capital ratio stands at a staggering 141% compared to less than 100% for Western Union.

In response, MoneyGram was able to reduce net debt and improve liquidity position. Also, as per the CFO, the company was able to “significantly improve its credit metrics” and “improve interest coverage”.

Moreover, through this strategic partnership with Ripple, MoneyGram is being able to settle major currencies and align the funding schedule with its settlement needs, thereby reducing operating costs and working capital requirements resulting in improving profits and more cash.

Figure 6: Quarterly change in balance sheet.

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Source: Seeking Alpha

The adjusted EBITDA on an as-reported basis was $68.8 million for the third quarter, an increase of 33% over last year. This was also made possible through significant foreign exchange gains in the quarter.

Hence, the lower value of the U.S. dollar against major currencies meant that the value of foreign base revenue was higher on a cash basis, which has been contributing to the improved cash flow.

There have also been changes effected to the capital structure.

In this instance, MoneyGram was able to close the chapter on control stock positions in Q4-2019. Also, during October, Goldman Sachs (NYSE:GS) completed liquidation of its convertible Series D preferred stock position through a series of trades in the open market.

According to the CFO Larry Angelilli during the Q3-2020 earnings call:

“This marks the end of control stock positions on MoneyGram and adding 8.9 million shares to the basic shares outstanding. Our stock is now more broadly held and liquid.”

These are welcome moves, but given the high debt level, risk-averse investors may wait for the fourth quarter to get visibility on refinancing terms.

For other investors who want to have some exposure to blockchain without necessarily owning cryptocurrencies like bitcoin, MoneyGram with that Ripple partnership is an investment opportunity.

They may be comforted to note that while the second wave of infections is once again wreaking havoc and impacting the economy, the impact seems more limited across the world.

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p class=”p p7″>The trailing EV/Sales of only 0.98 compares favorably to 2.3 for Western Union given the ability of the company to outmaneuver competitors and maintain growth through its differentiated money transfer services.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.

Credit: SeekingAlpha

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